Friday, June 1, 2012

This morning, I read a bit of Bill Neil's most recent exegesis, The Costs of “Creative Destruction”: Wendell Berry vs. Gene Sperling (unfortunately not available on the tubez just yet; email me if you would like a copy). Neil provides a devastating critique of the economic thinking of Democratic Party elites, using Sperling's speech before the National Press Club on March 27, 2012, entitled “Renaissance of American Manufacturing.” (Sperling is Chairman of President Obama’s Council of Economic advisors.)

In the 2000s, U.S. manufacturing suffered its worst performance in American history in terms of jobs. Not only did America lose 5.7 million manufacturing jobs, but the decline as a share of total manufacturing jobs (33 percent) exceeded the rate of loss in the Great Depression.1 Despite this unprecedented negative performance, most economists, pundits and elected officials are remarkably blasé about what has transpired. Manufacturing, they argue, has simply become incredibly productive. While tough on workers who are laid off, job losses indicate superior performance. All that is needed, if anything, are better programs to help laid-off workers.

This report argues that this dominant view on the loss of manufacturing jobs is fundamentally mistaken. Manufacturing lost jobs because manufacturing lost output, and it lost output because its ability to compete in global markets—some manipulated by egregious foreign mercantilist policies, others supported by better national competiveness policies, like lower corporate tax rates—declined significantly. In 2010, 13 of the 19 U.S. manufacturing sectors (employing 55 percent of manufacturing workers) were producing less than they there were in 2000 in terms of inflation-adjusted output.2 Moreover, we assert that the government’s official calculation of manufacturing output growth, and by definition productivity, is significantly overstated.

From the chapter entitled, "Capital Investment Trends in U.S. Manufacturing":

As we have noted, a more accurate measurement of U.S. manufacturing output suggests that superior productivity was not principally responsible for the loss of almost one-third of U.S. manufacturing jobs in the 2000s. If it were, we would also expect to see a reasonable increase in the stock of manufacturing machinery and equipment, for it is difficult to generate superior gains in productivity without concomitant increases in capital stock. Conversely, if loss of output due to declining U.S. competitiveness caused the decline of jobs, we would more likely see flat or declining capital stock. In fact, we see the latter, which is more evidence for the competitiveness failure hypothesis.

U.S. Manufacturing Capital Stock is Stagnant
Over the past decade, as Figure 45 shows, the overall amount of fixed capital investment (defined as investment in structures, equipment, and software) made by manufacturers as a share of GDP was at its lowest rate since World War II, when the Department of Commerce started tracking these numbers. An analysis by year shows that the annual rate has generally declined in the 2000s, going under 1.5 percent for several years for the only time since 1950. (See Figures 45 and 46) This decline represents the decreasing amounts invested, on average, in new manufacturing plants and equipment every year.

And here are some of the graphs from that chapter. I think they speak for themselves.